<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 000-26453
---------
COMMERCE ONE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 68-0322810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1600 Riviera Ave., Suite 200
Walnut Creek, CA 94596
(Address of principal executive offices)
(925) 941-6000
(Registrant's telephone number, including area code)
Indicate by check (X) whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of October 27, 1999, there were 24,061,999 shares of the registrant's
Common Stock outstanding.
<PAGE>
COMMERCE ONE, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998.................................................... 3
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 1999 and September 30, 1998.......... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and September 30, 1998...................... 5
Notes to Condensed Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations............................................ 9
Risk Factors............................................................. 19
Item 3. Quantitative and Qualitative Disclosures of Market Risk.................. 33
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 34
Item 2. Changes in Securities and Use of Proceeds................................ 34
Item 3. Defaults Upon Senior Securities.......................................... 34
Item 4. Submission of Matters to a Vote of Securities Holders.................... 34
Item 5. Other Information........................................................ 34
Item 6. Exhibits and Reports on Form 8-K......................................... 35
Signatures............................................................... 36
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCE ONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 116,161 $ 15,138
Accounts receivable, net .............................................. 7,777 1,200
Note receivable from stockholder ...................................... 5,000 -
Prepaid expenses and other current assets ............................. 2,679 629
---------- --------
Total current assets ..................................................... 131,617 16,967
Property and equipment, net .............................................. 5,691 2,590
Note receivable from Veo Systems, Inc. ................................... - 950
Intangible assets, net ................................................... 16,021 -
---------- --------
Total assets ............................................................. $ 153,329 $ 20,507
========== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ...................................................... $ 2,469 $ 709
Accrued compensation and related expenses ............................. 2,775 352
Current portion of capital lease obligations .......................... 315 448
Current portion of notes payable ...................................... 388 876
Deferred revenue ...................................................... 20,014 1,168
Other current liabilities ............................................. 2,939 1,637
---------- --------
Total current liabilities ................................................ 28,900 5,190
Capital lease obligations ................................................ 56 309
Notes payable ............................................................ 387 1,587
Commitments
Redeemable convertible preferred stock, no par value, issuable in series:
20,745,976 shares authorized; 8,777,829 issued and outstanding at
December 31,1998 ................................................... - 50,432
Stockholders' equity (deficit):
Convertible preferred stock, no par value; 22,000,000 shares
authorized (including 20,745,976 shares designated as redeemable
convertible preferred stock): 336,840 shares issued and outstanding
at December 31, 1998 ............................................... - 487
Common stock, no par value; 50,000,000 shares authorized; 24,056,172
and 3,299,068 shares issued and outstanding at September 30, 1999
and December 31, 1998, respectively ................................ 199,902 3,165
Deferred stock compensation ........................................... (2,051) (1,848)
Accumulated deficit ................................................... (73,727) (38,765)
Accumulated other comprehensive loss .................................. (138) (50)
---------- --------
Total stockholders' equity (deficit) ..................................... 123,986 (37,011)
---------- --------
Total liabilities, redeemable convertible preferred stock and
stockholders' equity (deficit) .................................. $ 153,329 $ 20,507
========== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
COMMERCE ONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------
1999 1998 1999 1998
-------------------------- -----------------------
<S> <C> <C> <C> <C>
Revenues:
License fees ........................ $ 7,778 $ 450 $ 11,504 $ 955
Services ............................ 2,585 276 5,165 594
-------- -------- -------- --------
Total revenues ........................ 10,363 726 16,669 1,549
-------- -------- -------- --------
Cost of revenues:
License fees ........................ 278 - 278 -
Services ............................ 4,490 1,352 9,254 2,987
-------- -------- -------- --------
Total cost of revenues ................ 4,768 1,352 9,532 2,987
-------- -------- -------- --------
Gross profit (loss) ................... 5,595 (626) 7,137 (1,438)
Operating expenses:
Sales and marketing ................. 9,361 3,329 19,758 9,213
Product development ................. 5,353 1,724 12,324 4,375
General and administrative .......... 1,226 534 2,976 1,326
Purchased in-process research and
development ........................ - - 3,037 -
Amortization of deferred stock
compensation ....................... 531 348 1,778 673
Amortization of goodwill and other
intangible assets .................. 1,053 - 2,977 -
-------- -------- -------- --------
Total operating expenses .............. 17,524 5,935 42,850 15,587
-------- -------- -------- --------
Loss from operations .................. (11,929) (6,561) (35,713) (17,025)
Interest income, net .................. 1,573 73 1,806 12
-------- -------- -------- --------
Net loss before income taxes .......... (10,356) (6,488) (33,907) (17,013)
Provision for income taxes ............ - - 586 -
-------- -------- -------- --------
Net loss .............................. $(10,356) $ (6,488) $(34,493) $(17,013)
======== ======== ======== ========
Pro forma basic and diluted
net loss per share .................. $ (0.45) $ (0.64) $ (1.88) $ (2.00)
======== ======== ======== ========
Shares used in calculation of pro
forma basic and diluted net loss per
share ............................... 23,236 10,200 18,332 8,516
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
COMMERCE ONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating activities:
Net loss ....................................................... $ (34,493) $ (17,013)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................... 1,581 684
Purchased in-process research and development ............... 3,037 -
Amortization of deferred stock compensation ................. 1,778 772
Amortization of goodwill and other intangible assets ........ 2,977 -
Changes in operating assets and liabilities:
Accounts receivable ...................................... (5,990) (89)
Prepaid expenses and other current assets ................ (1,980) 143
Accounts payable ......................................... 1,760 217
Accrued compensation and related expenses ................ 1,966 76
Other current liabilities ................................ 1,045 522
Deferred revenue ......................................... 18,846 391
--------- ---------
Net cash used in operating activities .......................... (9,473) (14,297)
Investing activities:
Purchase of property and equipment, net ........................ (4,516) (890)
Note receivable from stockholder ............................... (5,000) (5)
Acquisition of Veo Systems, Inc., net of cash acquired ......... (42) -
--------- ---------
Net cash used in investing activities .......................... (9,558) (895)
Financing activities:
Borrowings under (payment on) bank line of credit .............. - (750)
Proceeds from issuance of preferred stock ...................... 27,774 29,746
Issuance of common stock, net .................................. 94,442 (47)
Proceeds from borrowings on notes payable ...................... - 1,456
Payments on notes payable ...................................... (1,688) (285)
Payments on capital lease obligations .......................... (386) (289)
--------- ---------
Net cash provided by financing activities ...................... 120,142 29,831
--------- ---------
Effect of foreign currency translation on cash and cash
equivalents ................................................. (88) (32)
--------- ---------
Increase in cash and cash equivalents .......................... 101,023 14,607
Cash and cash equivalents at beginning of period ............... 15,138 9,367
--------- ---------
Cash and cash equivalents at end of period ..................... $ 116,161 $ 23,974
========= =========
Supplemental disclosures:
Interest paid .................................................. $ 302 $ 322
========= =========
Noncash investing and financing activities:
Capital lease obligations incurred ............................. $ - $ 544
========= =========
Deferred compensation related to stock option grants ........... $ 1,982 $ 1,823
========= =========
Conversion of borrowings under bank line of credit to note
payable ........................................................ $ 750 $ 750
========= =========
Acquisition of VEO Systems, Inc. with preferred stock, common
stock and assumption of stock options .......................... $ 21,151 $ -
========= =========
Conversion of convertible preferred stock into common stock .... $ 81,955 $ -
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
COMMERCE ONE, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principals for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three- and nine-month periods ended September 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's registration
statement on Form S-1 for the year ended December 31, 1998.
2. BASIC AND DILUTED NET LOSS SHARE
Basic and diluted net loss per share information for all periods is
presented under the requirements of FASB Statement No. 128, "Earnings per
Share" ("FAS 128"). Basic earnings per share has been computed using the
weighted-average number of shares of common stock outstanding during the
period, less shares that may be repurchased, and excludes any dilutive
effects of options, warrants, and convertible securities. Potentially
dilutive issuances have also been excluded from the computation of diluted
net loss per share as their inclusion would be antidilutive.
Pro forma net loss per share has been computed as described above
and also gives effect, under Securities and Exchange Commission guidance, to
the conversion of preferred shares not included above that automatically
converted to common shares upon completion of the Company's initial public
offering, using the if-converted method.
The calculation of historical and pro forma basic and diluted net
loss per share is as follows (in thousands, except per share amounts):
6
<PAGE>
COMMERCE ONE, INC
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (cont.)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
--------------- ------------- ------------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Historical:
Net loss...................................... $ (10,356) $ (6,488) $ (34,493) $ (17,013)
Preferred stock accretion..................... - (139) (469) (261)
--------------- ------------- ------------- ------------
Loss applicable to common stockholders........ $ (10,356) $ (6,627) $ (34,962) $ (17,274)
=============== ============= ============= ============
Weighted average shares of common stock
outstanding................................ 10,854 3,280 7,239 3,245
Less: Weighted average shares that may be
repurchased................................ (440) (212) (268) (236)
--------------- ------------- ------------- ------------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share................. 10,414 3,068 6,971 3,009
=============== ============= ============= ============
Basic and diluted net loss per share.......... $ (0.99) $ (2.16) $ (5.02) $ (5.74)
=============== ============= ============= ============
Pro forma:
Net loss $ (10,356) $ (6,488) $ (34,493) $ (17,013)
=============== ============= ============= ============
Weighted average shares used in computing
basic and diluted net loss per share
(from above) 10,414 3,068 6,971 3,009
Adjustment to reflect the effect of the
assumed conversion of preferred stock from
the date of issuance....................... 12,822 7,132 11,361 5,507
--------------- ------------- ------------- ------------
Weighted-average shares used in computing pro
forma basic and diluted net per loss share. 23,236 10,200 18,332 8,516
=============== ============= ============= ============
Pro forma basic and diluted net loss per share $ (0.45) $ (0.64) $ (1.88) $ (2.00)
=============== ============= ============= ============
</TABLE>
3. STOCKHOLDERS' EQUITY
In April 1999, the Company sold 2,758,819 shares of Series E
redeemable convertible preferred stock with net proceeds to the Company of
approximately $23.6 million.
In July 1999, the Company sold 3,795,000 shares of common stock in
its initial public offering and an additional 1,013,171 shares of common
stock in a concurrent private placement with gross proceeds to the Company of
approximately $92.9 million. In conjunction with the initial public offering,
all outstanding shares of the Company's preferred stock converted into shares
of common stock on a one-to-one basis.
7
<PAGE>
4. COMPREHENSIVE INCOME (LOSS)
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and displaying comprehensive income and its
components in financial statements. The only item of other comprehensive
(loss) which the Company currently reports is foreign translation adjustments
as shown below (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
------ ------ ------ ------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss............................... $(10,356) $(6,488) $(34,493) $(17,013)
Other comprehensive
income (loss):
Foreign currency
translation adjustment............. (43) (10) (88) (32)
---------- --------- ---------- ----------
Comprehensive loss..................... $(10,399) $(6,498) $(34,581) $(17,045)
========== ========= ========== ==========
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, that involve risks and uncertainties. These
forward-looking statements are typically denoted in this Quarterly Report by
the phrases "anticipates," "believes," "expects," "plans" and similar
phrases. Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in "Risk
Factors" beginning on page 19 of this Report.
OVERVIEW
Background
Commerce One is a leading provider of business-to-business
electronic commerce solutions that link buyers and suppliers of indirect
goods and services into trading communities over the Internet. We were
founded under the name DistriVision Development Corporation in 1994. In March
1997, we changed our name to Commerce One, Inc. and embarked on an aggressive
product development effort, which culminated in the release of the BUYSITE
and MARKETSITE products in April 1998. We released subsequent versions of the
BUYSITE and MARKETSITE products in November 1998 and April 1999.
History of Losses
We have never been profitable, we expect to incur net losses in the
foreseeable future and we may never be profitable. As of September 30, 1999,
we had an accumulated deficit of $73.7 million. Net losses have been incurred
in the last seven quarters and we expect this trend will continue.
Source of Revenues and Revenue Recognition Policy
We generate revenues from multiple sources. License fees are
generated from licensing the BUYSITE and MARKETSITE products to end-user
organizations, primarily Fortune 1000 enterprises. Professional service fees
are received from BUYSITE and MARKETSITE licensees and their suppliers for
enterprise resource planning integration, installation, content aggregation,
project management and other related services. Software maintenance revenues
are generated from product licensees based on the scope of their
implementation and the extent of the service provided. MARKETSITE access fees
are received from BUYSITE licensees, as well as other customers, for the
right to access services in MARKETSITE. Transaction fees are received from
suppliers for purchase orders the supplier receives through MARKETSITE. To
date, transaction and MARKETSITE access fees have been immaterial. However,
our revenue growth will depend upon realizing significant transaction and
MARKETSITE access fees in the future.
9
<PAGE>
Revenue Recognition
We recognize revenues from license agreements upon delivery and
acceptance of the software if there is persuasive evidence of an arrangement,
collection is probable, the fee is fixed or determinable, and there is
sufficient vendor-specific objective evidence to support allocating the total
fee to all elements of multiple-element arrangements. If an acceptance period
is required, license revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period.
We recognize revenues from professional services as the services are
provided. If a transaction includes both license and service elements, the
license fee is recognized on delivery and acceptance of the software,
provided services do not include significant customization or modification of
the base product, and the payment terms for licenses are not dependent on
additional acceptance criteria. In cases where license fee payments are
contingent on the acceptance of services, recognition of revenues is deferred
for both the license and the service elements until the acceptance criteria
are met. Software maintenance revenues and Marketsite Access fees are
recognized ratably over the term of the support contract, typically one year.
Effective January 1, 1998, we adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of
Position 98-4 ("SOP 98-4") which were issued by the American Institute of
Certified Public Accountants ("AICPA"). We believe our current revenue
recognition policies and practices are consistent with SOP 97-2 and SOP 98-4.
Additionally, the AICPA issued SOP 98-9 in December 1998, which provides
certain amendments to SOP 97-2, and is effective for transactions entered
into beginning January 1, 2000.
Limited Operating History
We have a limited operating history that makes it difficult to
forecast our future operating results. We expect to continue to substantially
increase our sales and marketing, product development and general and
administrative expenses. As a result, we will need to generate significant
additional revenues to achieve and maintain profitability in the future.
Although our revenues have grown in recent quarters, we cannot be certain
that such growth will continue or that we will achieve sufficient revenues
for profitability. If we do achieve profitability in any period, we cannot be
certain that we will sustain or increase such profitability on a quarterly or
annual basis.
RECENT EVENTS
Strategic Relationship with General Motors
On November 2, 1999, Commerce One and General Motors Corporation
entered into a non-binding memorandum of understanding providing for the
establishment of a business-to-business e-commerce portal among General
Motors and its suppliers. The portal is expected to facilitate and streamline
General Motors' procurement of goods from it suppliers, as well as these
suppliers' procurement of goods from each other. The portal will be owned by
General Motors and jointly operated by General Motors and Commerce One.
General Motors and Commerce One will share in the revenues generated by the
portal. General Motors and Commerce One expect that the portal will become
operational in the first quarter of 2000.
10
<PAGE>
In connection with the establishment of the portal, Commerce One anticipates
granting rights to General Motors to purchase up to 4.8 million shares of
Commerce One common stock at a purchase price of $0.0001 per share. The
rights will not be exercisable, however, until certain milestones related to
the operation of the portal are achieved. Commerce One will also agree to
nominate a representative of General Motors to serve on its board of
directors.
Commerce One and General Motors anticipate entering into definitive
agreements for the portal in the fourth quarter of 1999.
Acquisition of CommerceBid.com
On November 5, 1999, Commerce One agreed to acquire privately held
CommerceBid.com, a leading developer of business-to-business auction and
reverse auction service solutions. The acquisition was structured as a
tax-free, stock-for-stock exchange, and will be accounted for as a purchase
transaction. Commerce One will issue approximately 785,000 shares of
unregistered common stock and approximately $4.5 million in cash to the
CommerceBid.com stockholders in this transaction. The transaction closed in
November, 1999.
Forward-Looking Statements
The foregoing descriptions of recent events include forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements include statements concerning the
establishment of a business-to-business e-commerce portal, the anticipated
date of its commencement of operations, the anticipated date of Commerce One
and General Motors reaching definitive terms on the agreements that will
underlie the relationship between the two companies, the potential revenues
to be generated by the portal, the interoperability of the portal with other
business-to-business e-commerce portals, the potential efficiencies and cost
savings that may be realized from the portal, and the acquisition of
CommerceBid.com and the addition of auction capabilities to Commerce One's
software and service offerings. These statements are subject to risks and
uncertainties. Actual results may differ materially from those described in
such statements as a result of a number of factors. These factors include but
are not limited to the ability of Commerce One and General Motors to timely
enter into definitive agreements relating to the portal, the ability of the
two companies to timely and successfully launch the portal, the extent of
supplier and buyer adoption and utilization of the portal once it becomes
operational, the extent to which Commerce One and CommerceBid can integrate
their technology, personnel and businesses in order to offer auction software
and services and the extent to which customers adopt and utilize such
software services once they become available.
11
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenue
Total revenues increased to approximately $10.4 million for the
three months ended September 30, 1999 from approximately $726,000 for the
three months ended September 30, 1998. For the three months ended September
30, 1999, license fees and services revenues accounted for 75% and 25% of
total revenues, respectively. For the three months ended September 30, 1998,
license fees and services revenues accounted for 62% and 38% of total
revenues, respectively. A relatively small number of customers have accounted
for a significant portion of our total revenue to date.
Revenues from license fees increased to approximately $7.8 million
for the three months ended September 30, 1999 from approximately $450,000 for
the three months ended September 30, 1998. The increase in revenues from
license fees primarily resulted from an increase in new customers who
purchased and accepted the BUYSITE and MARKETSITE products.
Services revenues include revenue from professional services,
maintenance fees, and to a lesser degree, MarketSite access fees and
transaction fees. Services revenues increased to approximately $2.6 million
for the three months ended September 30, 1999 from approximately $276,000 for
the three months ended September 30, 1998. The increase in services revenues
resulted primarily from an increase in consulting revenue associated with
implementing our products at an increased number of customer sites. The
increase was also attributable to higher maintenance revenue resulting from
customer sites that have commenced maintenance over the past 12 months.
Cost of Revenues
Total cost of revenues increased to $4.8 million for the three
months ended September 30, 1999 from approximately $1.4 million for the three
months ended September 30, 1998. Cost of services, which primarily consists
of consulting, customer support and training costs, increased to $4.5 million
for the three months ended September 30, 1999 from $1.4 million for the three
months ended September 30, 1998. The increase in cost of services resulted
primarily from an increase in personnel related expenses due to the hiring
and training of consulting, support and training personnel in the United
States and Europe. Additionally, an increase in allocated overhead expenses
and third party consultants contributed to the increase. Cost of services
also includes software media and duplication and software documentation
costs, although these costs have not been material to date. Cost of license
fees for the three months ended September 30, 1999 consisted solely of
royalties due to a reseller.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the costs of seminars, promotional materials,
trade shows and other sales and marketing programs. Sales and marketing
expenses increased to approximately $9.4 million for the three months ended
September 30, 1999 from approximately $3.3 million for the three months ended
September 30, 1998. This increase was primarily attributable to an overall
increase in the number of sales and marketing personnel as well as an
increase in marketing related activity. The number of employees engaged in
sales and marketing increased to 117 at September 30, 1999 from 51 at
September 30, 1998. The increase was also attributable to increased
commission expense and travel related expense resulting from increased sales
activity. In addition, an increase in marketing related expenses and
allocated overhead expenses contributed to the overall increase. We expect
that the dollar amount of sales and marketing expenses will continue to
increase
12
<PAGE>
due to the planned growth of our sales force, including the establishment of
sales offices in additional domestic and international locations, and due to
expected additional increases in marketing programs and other promotional
activities.
Product Development Expenses
Product development expenses consist primarily of personnel and
related costs associated with our product development efforts. Product
development expenses increased to approximately $5.4 million for the three
months ended September 30, 1999 from approximately $1.7 million for the three
months ended September 30, 1998. The increase was primarily due to an
increase in personnel related expenses, including the addition of 22
employees from the acquisition of VEO Systems in January 1999, to support
development of the BUYSITE and MARKETSITE products which were partially
offset by government funded reimbursement of expenses related to development
work. The overall number of employees engaged in product development
increased to 150 at September 30, 1999 from 39 at September 30, 1998. In
addition, increases in allocated overhead expenses contributed to the overall
increase. We believe that investments in product development are essential to
our future success and expect that the dollar amount of product development
expenses will increase in future periods.
General and Administrative Expenses
General and administrative expenses consist primarily of employee
salaries and related expenses for executive, administrative and finance
personnel. General and administrative expenses increased to approximately
$1.2 million for the three months ended September 30, 1999 from approximately
$534,000 for the three months ended September 30, 1998. This increase was
primarily attributable to an increase in personnel related expenses. The
number of employees engaged in general and administrative functions increased
to 28 at September 30, 1999 from 9 at September 30, 1998. In addition, an
increase in allocated overhead and legal expenses, partially offset by lower
consulting expenses, contributed to the overall increase. We expect general
and administrative expenses to increase modestly in future periods.
Amortization of Deferred Stock Compensation
During the three months ended September 30, 1999, amortization of
deferred stock compensation totaled approximately $531,000. The deferred
stock compensation is being amortized over the four year vesting periods of
the related options using a graded vesting method.
Net Loss
Our net loss increased to approximately $10.4 million for the three
months ended September 30, 1999 from approximately $6.5 million for the
comparable period in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenue
Total revenues increased to approximately $16.7 million for the nine
months ended September 30, 1999 from approximately $1.5 million for the nine
months ended September 30, 1998. For the nine months ended September 30,
1999, license fees and services revenues accounted for 69% and 31% of total
revenues, respectively. For the nine months ended September 30, 1998, license
fees and services revenues accounted for 62% and 38% of total revenues,
respectively.
13
<PAGE>
Revenues from license fees increased to approximately $11.5 million
for the nine months ended September 30, 1999 from approximately $955,000 for
the nine months ended September 30, 1998. The increase in revenues from
license fees primarily resulted from an increase in new customers who
purchased and accepted the BUYSITE and MARKETSITE products.
Services revenues include revenue from professional services,
maintenance fees, and to a lesser degree, MarketSite access fees and
transaction fees. Services revenues increased to approximately $5.2 million
for the nine months ended September 30, 1999 from approximately $594,000 for
the nine months ended September 30, 1998. The increase in services revenues
resulted primarily from an increase in consulting revenue associated with
implementing our products at an increased number of customer sites. The
increase was also attributable to higher maintenance revenue resulting from
customer sites that have commenced maintenance over the past 12 months.
Cost of Revenues
Total cost of revenues increased to $9.5 million for the nine months
ended September 30, 1999 from approximately $3.0 million for the nine months
ended September 30, 1998. Cost of services, which primarily consists of
consulting, customer support and training costs, increased to $9.3 million
for the nine months ended September 30, 1999 from $3.0 million for the nine
months ended September 30, 1998. The increase in cost of services resulted
primarily from an increase in personnel related expenses due to the hiring
and training of consulting, support and training personnel in the United
States and Europe. Additionally, an increase in allocated overhead expenses
and third party consultants contributed to the increase. Cost of services
also includes software media and duplication and software documentation
costs, although these costs have not been material to date. Cost of license
fees for the nine months ended September 30, 1999 consisted solely of
royalties due to a reseller.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the costs of seminars, promotional materials,
trade shows and other sales and marketing programs. Sales and marketing
expenses increased to approximately $19.8 million for the nine months ended
September 30, 1999 from approximately $9.2 million for the nine months ended
September 30,1998. This increase was primarily attributable to an overall
increase in the number of sales and marketing personnel as well as an
increase in marketing related activity. The number of employees engaged in
sales and marketing increased to 117 at September 30, 1999 from 54 at
September 30, 1998. The increase was also attributable to increased
commission expense and travel related expense resulting from increased sales
activity. In addition, an increase in marketing related expenses and
allocated overhead expenses contributed to the overall increase.
Product Development Expenses
Product development expenses consist primarily of personnel and
related costs associated with our product development efforts. Product
development expenses increased to approximately $12.3 million for the nine
months ended September 30, 1999 from approximately $4.4 million for the nine
months ended September 30, 1998. The increase was primarily due to an
increase in personnel related expenses, including the addition of 22
employees from the acquisition of VEO Systems in January 1999, to support
development of the BUYSITE and MARKETSITE products which were partially
offset by government funded reimbursement of expenses related to development
work. The overall number of employees engaged in product development
increased to 150 at September 30, 1999 from 39 at September 30, 1998. In
addition, increases in allocated overhead expenses and, to a lesser degree,
consulting expenses contributed to the overall increase.
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General and Administrative Expenses
General and administrative expenses consist primarily of employee
salaries and related expenses for executive, administrative and finance
personnel. General and administrative expenses increased to approximately
$3.0 million for the nine months ended September 30, 1999 from approximately
$1.3 million for the nine months ended September 30, 1998. This increase was
primarily attributable to an increase in personnel related expenses. The
number of employees engaged in general and administrative functions increased
to 28 at September 30, 1999 from 9 at September 30, 1998. In addition, an
increase in allocated overhead and legal expenses, partially offset by lower
consulting expenses, contributed to the overall increase.
Purchased In-Process Research and Development
In January 1999, we acquired VEO Systems, Inc., a company
specializing in the creation of extensible mark-up language software
technology applications, to complement our existing technologies. We
accounted for the VEO Systems acquisition as a purchase transaction. The
purchase consideration was approximately $23.2 million consisting of shares
of common and preferred stock, stock options assumed, and $400,000 in cash
plus an additional $400,000 in contingent consideration.
We estimated that approximately $3.0 million of the $23.2 million
purchase consideration represented purchased in-process research and
development that has not yet reached technological feasibility and has no
alternative future use. Accordingly, we charged this amount to operations in
the three months ended March 31, 1999. A total of approximately $3.5 million
of the purchase consideration was allocated to other intangible assets,
including existing technology ($2.3 million), assembled workforce ($541,000)
and tradenames and patents ($693,000), with these amounts being amortized
over periods of four, two and five years, respectively.
Purchased in-process research and development consisted of a single
project, the development of a set of software tools which is being designed
to enable applications developers to generate programs to interface with the
extensible mark-up language document interchange and transport server. These
tools will be integrated into our products. The efforts required to develop
the acquired in-process technology include the completion of all planning,
designing, and testing activities that are necessary to establish that the
product or service can be produced to meet its design requirements, including
functions, features, and technical performance requirements.
These development tools are based on VEO Systems' proprietary
platform and new standards utilizing extensible mark-up language and will be
scalable, will have new security features and functionality and will have
capabilities for several new services. Significant risk factors with respect
to the timely completion of the development of the technology include the
successful development of the new platform, the development of the schema for
object oriented extensible mark-up language operating language, development
of specific service modules, the configuration into a scalable product, the
interoperability independent of any operating language and maintaining
project timing schedules and retention of key development personnel.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream of the related
product revenues. The discounted cash flow analysis was based on management's
forecast of future revenues, cost of revenues, and operating expenses related
to the products and technologies purchased from VEO Systems. The calculation
of value was then adjusted to reflect only the value creation efforts of VEO
Systems prior to the close of the acquisition. At the time of the
acquisition, the product was approximately 46.0% complete with approximately
$1.3 million in estimated costs remaining which are expected to be incurred
in 1999. The technology was expected to be available for use in our products
in late 1999 and have a technology life of approximately five years. The
resultant value of in-process
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technology was further reduced by the estimated value of core technology,
which was included in capitalized developed technology.
The discount rates selected for estimating future discounted cash
flows for developed and in-process technology were 20.0% and 30.0%,
respectively. In the selection of the appropriate discount rates,
consideration was given to our estimated weighted average return on working
capital and our estimated weighted average return on assets. The discount
rate utilized for the in-process technology was determined to be higher than
our estimated weighted average return on working capital due to the fact that
the technology had not yet reached technological feasibility as of the date
of valuation. In utilizing a discount rate greater than our weighted average
return on working capital, we have reflected the risk premium associated with
achieving and sustaining growth rates and improved profitability as well as
the increased rates of return associated with intangible assets.
Amortization of Deferred Stock Compensation
In the nine months ended September 30, 1999, we recorded aggregate
deferred stock compensation totaling approximately $2.0 million in connection
with certain stock option grants. The deferred stock compensation is being
amortized over the four year vesting period of the related options using a
graded vesting method. During the nine months ended September 30, 1999,
amortization of deferred stock compensation totaled approximately $1.8 million.
Provision for Income Taxes
The provision for income taxes consist of withholding tax related to
international sales.
Net Loss
Our net loss increased to approximately $34.5 million for the nine
months ended September 30, 1999 from approximately $17.0 million for the
comparable period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have historically satisfied our cash requirements primarily
through issuances of equity securities and lease and debt financing. On
July 7, 1999, we closed the initial public offering and a concurrent private
placement which resulted in net proceeds of approximately $92.9 million.
Net cash used in operating activities totaled approximately $9.5
million for the nine months ended September 30, 1999 as compared to
approximately $14.3 million for the nine months ended September 30, 1998. Cash
used in operating activities for each period resulted primarily from net
losses in those periods.
Net cash used in investing activities totaled approximately $9.6
million for the nine months ended September 30, 1999 as compared to
approximately $0.9 million for the nine months ended September 30, 1998. The
uses in each period resulted from the acquisition of capital assets,
primarily computer and office equipment, as well as a note receivable from
a stockholder for the current period.
Net cash provided by financing activities totaled approximately
$120.1 million for the nine months ended September 30, 1999 as compared to
approximately $29.8 million for the nine months ended September 30, 1998. The
cash provided in the
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current period resulted primarily from an initial public offering and a
concurrent private placement completed on July 7, 1999 which resulted in net
proceeds of approximately $92.9 million. The cash provided in the prior
period resulted primarily from the net proceeds from issuances of convertible
preferred stock and proceeds from option exercises.
As of September 30, 1999, our principal sources of liquidity
included approximately $116.2 million of cash and cash equivalents. We
anticipate an increase in our capital expenditures consistent with
anticipated growth in operations, infrastructure and personnel.
We believe that our available cash resources together with the net
proceeds from our recent public offering and the concurrent private placement
will be sufficient to finance our presently anticipated operating losses and
working capital expenditure requirements for at least the next 12 months. Our
future liquidity and capital requirements will depend upon numerous factors.
The rate of expansion of our operations in response to potential growth
opportunities and competitive pressures will affect our capital requirements
as will funding of continued net losses and substantial negative cash flows.
Additionally, we may need additional capital to fund acquisitions of
complementary businesses, products and technologies. Our forecast of the
period of time through which its financial resources will be adequate to
support operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary materially as a result of the
factors described above. If we require additional capital resources, we may
seek to sell additional equity or debt securities or secure a bank line of
credit. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders. We cannot assure you that
any financing arrangements will be available in amounts or on terms
acceptable to us, if at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems, software products and other
control devices are unable to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, many companies' computer
systems, software products and control devices may need to be upgraded or
replaced in order to operate properly in the year 2000 and beyond.
The internal systems used to deliver our services utilize
third-party hardware and software. We have contacted all infrastructure
products' vendors and are in the process of contacting the few remaining
outside service providers with whom we have not yet spoken in order to gauge
their year 2000 compliance. Based on these vendors' representations, we
believe that there are a number of third-party hardware and software systems,
some of which are material to our products and operations, that require some
upgrade in order to be year 2000 compliant. The upgrades will be performed by
a combination of our internal technical staff and outside specialized vendors
and contractors. We originally believed that all of our software would be
year 2000 compliant by September 1999 and all of our hardware would be year
2000 compliant by November 1999. We determined that our product software is
compliant as disclosed in our Information Readiness Disclosure Act Y2K
disclosure statement and our hardware is compliant. We are currently
upgrading internal third party software, a process that we will complete in
November 1999. We are currently in the process of effecting these upgrades
and currently estimate the costs of such efforts to be less than $500,000.
The time period in which we expect to upgrade
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our software and hardware to be year 2000 compliant is a forward-looking
statement that is subject to risks and uncertainties. Actual results may
differ materially from those described as a result of a number of factors,
including difficulties in identifying or upgrading software or hardware
systems that are not currently year 2000 compliant and in coordinating these
efforts through our internal technical staff and specialized contractors. We
expect to be able to complete these upgrades before any year 2000 problem
could arise and with ample time to test and refine any adjustments made.
Unanticipated problems such as material costs caused by undetected errors or
defects in the technology used in our internal systems could delay our
completion of the upgrades.
In addition, our customers' and commerce service providers partners'
internal operating systems and other software applications must operate
effectively for them to use our products and services effectively. If these
systems or applications are not year 2000 compliant, our customers may not
use our products and services and the commerce service provider partners may
not be able to host our solutions. We cannot predict to what extent our
customers' and commerce service providers partners' systems and applications
are year 2000 compliant.
As the year 2000 approaches, there is a risk that orders for our
products will be reduced or delayed as information technology departments
within companies reallocate their capital expenditures to prepare for the
year 2000 and resolve year 2000 problems. If companies do defer purchases of
our products and services because of such reallocation, such a resulting
reduction in orders could significantly impact our business.
If, in the future, it comes to our attention that some of our
products need modification, or some of our third-party hardware and software
is not year 2000 compliant, then we will seek to make modifications. In such
case, we expect such modifications to be made on a timely basis, and we do
not believe that the cost of such modifications will materially harm our
operating results. We cannot assure you, however, that we will be able to
modify our products, services and systems in a timely and successful manner
to comply with the year 2000 requirements.
The worst case scenario for year 2000 problems for us would be the
need for us to cease normal operations for an indefinite period of time while
we attempt to respond to customers' and suppliers' year 2000 problems without
having full internal operational capabilities. We are in the process of
assessing our exposure to liability for any failure to provide year 2000
compliant products to our customers and suppliers. In the event that year
2000 issues are not resolved in a timely manner, we are developing a disaster
recovery plan that is scheduled to be completed by November 1999. The cost of
developing and implementing our plan we estimate to be less than $250,000.
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RISK FACTORS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Securities Litigation Reform Act of 1995 that involve
risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and
elsewhere in this report.
WE ARE AN EARLY STAGE COMPANY, WE HAVE A HISTORY OF LOSSES AND WE EXPECT
FUTURE LOSSES.
We have never been profitable, we expect to incur net losses for the
foreseeable future and we may never be profitable. We incurred net losses of
$34.5 million and $17.0 million for the nine months ended September 30, 1999
and 1998, respectively. As of September 30, 1999, we had an accumulated
deficit of $73.7 million.
We were founded in January 1994, first shipped our current line of
products in 1998 and recently introduced new versions of these products. We
have a limited operating history that makes it difficult to forecast our
future operating results. We expect to substantially increase our sales and
marketing, product development and general and administrative expenses. As a
result we will need to generate significant additional revenues to achieve
and maintain profitability in the future. Although our revenues have grown in
recent quarters, we cannot be certain that such growth will continue or that
we will achieve sufficient revenues for profitability. If we do achieve
profitability in any period, we cannot be certain that we will sustain or
increase such profitability on a quarterly or annual basis.
THE QUARTERLY FINANCIAL RESULTS OF COMPANIES IN OUR INDUSTRY ARE PRONE TO
SIGNIFICANT FLUCTUATIONS AND THIS COULD CAUSE OUR STOCK PRICE TO FALL.
We believe that quarter-to-quarter comparisons of our revenues and
operating results are not necessarily meaningful, and that such comparisons
may not be accurate indicators of future performance. The operating results
of companies in the electronic commerce industry have in the past experienced
significant quarter-to-quarter fluctuations. If our revenues for a quarter
fall below our expectations and we are not able to quickly reduce our
spending in response, our operating results for that quarter would be harmed.
It is likely that in some future quarter our operating results may be below
the expectations of public market analysts and investors and, as a result,
the price of our common stock may fall. As with other companies in our
industry, our operating expenses, which include sales and marketing, product
development and general and administrative expenses, are based on our
expectations of future revenues and are relatively fixed in the short term.
OUR FUTURE SUCCESS DEPENDS UPON OUR COMMERCE SERVICE PROVIDER
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PARTNERS DEVELOPING AND OPERATING SUCCESSFUL MARKETSITE MARKETPLACES; IF
MARKETPLACES DEVELOPED BY OUR PARTNERS ARE NOT SUCCESSFUL, WE WILL NOT
GENERATE SUFFICIENT REVENUES TO SUSTAIN OUR BUSINESS OR ALLOW US TO GROW.
We have established strategic relationships with British
Telecommunications, Nippon Telegraph and Telephone and Singapore
Telecommunications, each of whom has licensed our BUYSITE and MARKETSITE
PLATFORM products in order to create MARKETSITE marketplaces. These
MARKETSITE marketplaces are planned for in the United Kingdom, Japan and
Southeast Asia. We cannot assure you that these partners will be able to
implement our products and services effectively, that they will develop and
launch MARKETSITE marketplaces or that buyers or suppliers will participate
in their MARKETSITE marketplaces. If these or any other MARKETSITE
marketplaces are not successful, our business, operating results and
financial condition will suffer.
None of British Telecommunications, Nippon Telegraph and Telephone
or Singapore Telecommunications has launched a MARKETSITE marketplace, nor
are they obligated to develop and operate these marketplaces. Additionally,
although our technology architecture supports the development of trading
communities that can operate with each other, we cannot assure you that their
marketplaces will in fact operate with each other. Furthermore, we cannot
assure you that these marketplaces will be able to be successfully adapt to
address markets of different size, scope and geography.
OUR STRATEGY OF ESTABLISHING MARKETSITE MARKETPLACES AS TRADING COMMUNITIES
IS UNPROVEN AND MAY NOT BE SUCCESSFUL.
As part of our business strategy, we intend, directly and through
relationships with our strategic partners, to establish and maintain
MARKETSITE marketplaces where buyers and suppliers can conduct
business-to-business electronic commerce. If this business strategy is
flawed, or if we are unable to execute it effectively, our business,
operating results and financial condition will be substantially harmed. This
strategy is unproven and currently the only operating trading community based
on our products is MARKETSITE.NET, which we operate. We have limited
experience developing and operating MARKETSITE marketplaces, and we cannot
assure you that these trading communities will be operated effectively, that
buyers or suppliers will license our products and join and remain in these
trading communities, or that we will generate significant revenues from these
communities. To date, we have not generated significant revenue from
MARKETSITE.NET.
BECAUSE OUR INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY, WE
CANNOT ASSURE YOU THAT WE WILL BE ABLE TO EFFECTIVELY COMPETE.
The market for Internet-based, business-to-business electronic
commerce solutions is extremely competitive. We expect competition to
intensify as current competitors expand their product offerings and new
competitors enter the
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market. We cannot assure you that we will be able to compete successfully
against current or future competitors, or that competitive pressures we face
will not harm our business, operating results or financial condition.
Because there are relatively low barriers to entry in the electronic
commerce market, competition from other established and emerging companies
may develop in the future. In addition, our customers and partners may become
competitors in the future. Certain of our competitors may be able to
negotiate alliances with strategic partners on more favorable terms than we
are able to negotiate. Many of our competitors may also have well-established
relationships with our existing and prospective customers. Increased
competition is likely to result in price reductions, lower average sales
prices, reduced margins, longer sales cycles and decrease or loss of our
market share, any of which could harm our business, operating results or
financial condition.
Many of our competitors have, and new potential competitors may
have, more experience developing Internet-based software and end-to-end
purchasing solutions, larger technical staffs, larger customer bases, more
established distribution channels, greater brand recognition and greater
financial, marketing and other resources than we have. In addition,
competitors may be able to develop products and services that are superior to
our products and services, that achieve greater customer acceptance or that
have significantly improved functionality as compared to our existing and
future products and services. We cannot assure you that the
business-to-business electronic commerce solutions offered by our competitors
now or in the future will not be perceived by buyers and suppliers as
superior to ours.
OUR LENGTHY SALES AND IMPLEMENTATION CYCLE COULD CAUSE DELAYS IN REVENUE
GROWTH.
The period between our initial contact with a potential customer and
the purchase of our products and services is often long and may have delays
associated with the lengthy budgeting and approval process of our customers.
Historically, our typical sales cycle has been approximately six to nine
months and the implementation cycle at customer sites has been approximately
an additional six to twelve months. These lengthy cycles will have a negative
impact on the timing of our revenues, especially our realization of any
transaction fee based revenues.
We believe that a customer's decision to purchase our products and
services is discretionary, involves a significant commitment of resources,
and is influenced by customer budgetary cycles. To successfully sell our
products and services, we generally must educate our potential customers
regarding the use and benefit of our products and services, which can require
significant time and resources. Many of our potential customers are large
enterprises that generally take longer to make significant business
decisions. In addition, our solutions include enterprise applications that
take significant time to deploy successfully across an organization.
IF OUR POTENTIAL CUSTOMERS ARE NOT WILLING TO SWITCH TO OR ADOPT
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OUR ELECTRONIC COMMERCE SOLUTION, OUR GROWTH AND REVENUES WILL BE LIMITED.
The failure to generate a large customer base would harm our growth
and revenues. This failure could occur for several reasons. Some of our
business-to-business electronic commerce competitors charge their customers
large fees upon the execution of customer agreements. Businesses that have
made substantial up-front payments to our competitors for electronic commerce
solutions may be reluctant to replace their current solution and adopt our
solution. As a result, our efforts to create a larger customer base may be
more difficult than expected even if we are deemed to offer products and
services superior to those of our competitors. Further, because the
business-to-business electronic commerce market is new and underdeveloped,
potential customers in this market may be confused or uncertain about the
relative merits of each electronic commerce solution or which electronic
commerce solution to adopt, if any. Confusion and uncertainty in the
marketplace may inhibit customers from adopting our solution, which could
harm our business, operating results and financial condition.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND
FAILURE TO MANAGE OUR GROWTH COULD STRAIN OUR MANAGEMENT AND OTHER RESOURCES.
Our ability to successfully offer products and services and
implement our business plan in a rapidly evolving market requires an
effective planning and management process. Future expansion efforts could be
expensive and put a strain on our management and resources. We have
increased, and plan to continue to increase, the scope of our operations at a
rapid rate. Our headcount has grown and will continue to grow substantially.
At December 31, 1998, we had a total of 156 employees, and at September 30,
1999, we had a total of 428 employees. In addition, we expect to hire a
significant number of new employees in the near future. To manage future
growth effectively, we must maintain and enhance our financial and accounting
systems and controls, integrate new personnel and manage expanded operations.
OUR CUSTOMER BASE IS CONCENTRATED AND OUR SUCCESS DEPENDS IN PART ON OUR
ABILITY TO RETAIN EXISTING CUSTOMERS.
If one or more of our major customers were to substantially reduce
or stop their use of our products or services, our business, operating
results and financial condition would be harmed. We do not have long-term
contractual commitments from any of our current customers and our customers
may terminate their contracts with us with little or no advance notice and
without significant penalty to them. As a result, we cannot assure you that
any of our current customers will be customers in future periods. A customer
termination would not only result in lost revenue, but also the loss of
customer references that are necessary for securing future customers.
IF SUPPLIERS DO NOT PARTICIPATE IN THE MARKETSITE MARKETPLACES, OUR
MARKETSITE MARKETPLACE PRODUCTS WILL NOT GROW AND OUR
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REVENUES WILL SUFFER.
If an adequate number of suppliers do not participate in the
MARKETSITE marketplaces, our MARKETSITE marketplace products will not grow
and our revenues will suffer. To date, only a limited number of suppliers of
certain types of goods, such as office supplies, are connected to
MARKETSITE.NET which, along with British Telecommunications and Singapore
Telecommunications, are currently the only operational MARKETSITE
marketplaces. MARKETSITE marketplaces will be attractive to suppliers only if
a significant number of buyers are willing to purchase goods and services
through the MARKETSITE marketplaces. We cannot assure you that the goods and
services currently available or made available in the future on MARKETSITE
marketplaces will be sufficient to attract and retain buyers or that we will
be able to make available the goods and services buyers will want in the
future. Suppliers incur costs making information relating to their goods and
services available on these trading communities and thus must realize
additional revenues to justify their continued participation in these trading
communities. We cannot assure you that the suppliers will remain in the
MARKETSITE marketplaces or that new suppliers will join these communities.
OUR FUTURE REVENUES DEPEND UPON OUR ABILITY TO INCREASE TRANSACTION VOLUME ON
MARKETSITE MARKETPLACES.
If the transaction volume on the MARKETSITE marketplaces does not
grow, it is unlikely that we will ever achieve or maintain profitability. We
currently derive substantially all of our revenues from licensing our
MARKETSITE and BUYSITE solution to buyers and providing related services.
Transaction revenue from MARKETSITE has been immaterial to date. However, our
business model calls for a significant portion of our revenues in the future
to be based upon a percentage of the transactions completed on MARKETSITE
marketplaces developed by current and future MARKETSITE PLATFORM licensees.
Accordingly, our future revenues will depend significantly on the number of
transactions that are successfully completed on the MARKETSITE marketplaces.
IF OUR ELECTRONIC COMMERCE PRODUCTS DO NOT CONTAIN THE FEATURES AND
FUNCTIONALITY OUR CUSTOMERS WANT, OUR CUSTOMERS WILL NOT BUY THEM.
Our success depends upon our ability to accurately determine the
features and functionality required by customers and to design and implement
business-to-business electronic commerce products that meet these
requirements in a timely and efficient manner. If we fail to accurately
determine customer feature and functionality requirements, enhance our
existing products and develop new products, our current and potential future
customers will not buy them. To date, our products have been based on our
internal efforts and on feedback from a limited number of customers and
potential customers. We cannot assure you that we have determined or will
successfully determine customer requirements or that the features and
functionality of our future products and services will adequately satisfy
current or future customer demands.
OUR FUTURE REVENUES DEPEND UPON CURRENT AND POTENTIAL CUSTOMERS INTEGRATING
OUR SOLUTIONS INTO THEIR BUSINESSES.
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Our success depends upon the acceptance and successful integration
by customers and their suppliers of our BUYSITE and MARKETSITE PLATFORM
products. Our current customers and potential customers and their related
suppliers often rely on third-party systems integrators such as
PriceWaterhouseCoopers, MCI Systemhouse and Cambridge Technology Partners and
others to develop, deploy and manage their Internet-based,
business-to-business electronic commerce platforms and solutions. If a large
number of systems integrators fail to adopt and support our solution, if any
of our customers or suppliers are not able to successfully integrate our
solution or if we are unable to adequately train our existing systems
integration partners, our business, operating results and financial condition
will suffer.
OUR STRATEGY OF ESTABLISHING STRATEGIC RESELLING RELATIONSHIPS WITH OUR
PARTNERS IS UNPROVEN AND MAY NOT BE SUCCESSFUL.
We have recently established strategic relationships with
PeopleSoft, British Telecommunications, Singapore Telecommunications, and
Cable and Wireless Optus, each of whom is entitled to resell our existing
BUYSITE application to their customers. These relationships are new and this
strategy is unproven, and we cannot assure you that any of these resellers,
or those we may appoint in the future, will be able to resell our BUYSITE
product to a sufficient number of customers, or that those customers will
purchase our applications and more importantly, connect into MARKETSITE
marketplaces. If our current or future strategic partners are not able to
successfully resell our BUYSITE product, our business will suffer.
In addition, as part of our overall portal relationship with GM, we
will rely upon GM's ability to resell our BUYSITE application to their
supplier community. If GM and Commerce One cannot resell effectively our
BUYSITE product, the rate of growth of the GM TradeXchange will suffer.
CONTINUED ADOPTION OF THE INTERNET AS A METHOD OF CONDUCTING BUSINESS IS
NECESSARY FOR OUR FUTURE GROWTH.
The market for Internet-based, business-to-business electronic
commerce products is relatively new and is evolving rapidly. Our future
revenues and any future profits depend upon the widespread acceptance and use
of the Internet as an effective medium of business-to-business commerce,
particularly as a medium to perform indirect goods procurement and
fulfillment functions. The failure of the Internet to continue to develop as
a commercial or business medium or of significant numbers of buyers and
suppliers of indirect goods to conduct business-to-business commerce on the
Internet would harm our business, operating results and financial condition.
The acceptance and use of the Internet for business-to-business commerce
could be limited by a number of factors, such as the growth and use of the
Internet in general, the relative ease of conducting business on the
Internet, the efficiencies and improvements that conducting commerce on the
Internet provides, concerns about transaction security and taxation of
transactions on the Internet.
OUR MARKET MAY UNDERGO RAPID TECHNOLOGICAL CHANGE AND THIS CHANGE MAY MAKE
OUR PRODUCTS AND SERVICES OBSOLETE OR CAUSE US TO INCUR SUBSTANTIAL COSTS TO
ADAPT TO THESE CHANGES.
Failure of the market for our products and services to develop and
grow or our failure to gain acceptance in this market would harm our
business, operating results and financial condition. Our market is
characterized by rapidly changing
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technology, evolving industry standards and frequent new product
announcements. To be successful, we must adapt to our rapidly changing market
by continually improving the performance, features and reliability of our
products and services or else our products and services may become obsolete.
We also could incur substantial costs to modify our products, services or
infrastructure in order to adapt to these changes. Our business, operating
results and financial condition could be harmed if we incur significant costs
without adequate results, or find ourselves unable to adapt rapidly to these
changes.
DELAYS IN RELEASING ENHANCED VERSIONS OF OUR PRODUCTS COULD ADVERSELY AFFECT
OUR COMPETITIVE POSITION.
As part of our strategy, we expect to release new versions of our
BUYSITE and MARKETSITE PLATFORM products in the second half of 1999. These
new releases are currently expected to increase functionality of our BUYSITE
products and incorporate our extensible mark-up language software technology
to increase the functionality of our MARKETSITE products to further enable
the addition of new services to our MARKETSITE products. Even if our new
versions contain the features and functionality our customers want, if we are
unable to timely introduce these new product releases, our competitive
position may be harmed. The timing of the release of these new products is a
forward-looking statement that may involve risks and uncertainties and the
actual timing of such release may differ materially from this as a result of
a number of factors. In the past, we have experienced delays releasing new
products. As a result, we cannot assure you that we will be able to
successfully complete the development of currently planned or future products
in a timely and efficient manner. Due to the complexity of these products,
internal quality assurance testing and customer testing of pre-commercial
releases may reveal product performance issues or desirable feature
enhancements that could lead us to postpone the release of these new
versions. In addition, the reallocation of resources associated with any such
postponement would likely cause delays in the development and release of
other future products or enhancements to our currently available products.
IF OUR EXTENSIBLE MARK-UP LANGUAGE SOFTWARE TECHNOLOGY DOES NOT PROVE TO BE
EFFECTIVE, WE WILL NOT REMAIN COMPETITIVE.
In connection with our acquisition of VEO Systems, we acquired the
rights to its extensible mark-up language software technology. This
technology is an information modeling language for data exchange in
electronic commerce applications. If we are unable to utilize this technology
effectively or if this technology is not compatible with our other technology
or technology we develop or acquire in the future, we will not remain
competitive in our industry. Although we have not yet experienced any
material problems with this technology in our product development process, we
have only limited experience utilizing this technology to date.
FAILURE TO EXPAND INTERNET INFRASTRUCTURE COULD LIMIT OUR FUTURE GROWTH.
The recent growth in Internet traffic has caused frequent periods of
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decreased performance, and if Internet usage continues to grow rapidly, its
infrastructure may not be able to support these demands and its performance
and reliability may decline. If outages or delays on the Internet occur
frequently or increase in frequency, overall Internet usage including usage
of our products and services could grow more slowly or decline. Our ability
to increase the speed and scope of our services to customers is ultimately
limited by and depends upon the speed and reliability of both the Internet
and our customers' internal networks. Consequently, the emergence and growth
of the market for our services depends upon improvements being made to the
entire Internet as well as to our individual customers' networking
infrastructures to alleviate overloading and congestion. If these
improvements are not made, the ability of our customers to utilize our
solution will be hindered, and our business, operating results and financial
condition may suffer.
OUR REVENUES MAY DECREASE IF GROWTH IN THE USE OF THE INTERNET IN THE MARKETS
WE TARGET DOES NOT OCCUR AS PROJECTED.
The use of the Internet as a means to interconnect buyers and
sellers and to create online trading communities is integral to our business
model. Our business strategy is, in part, to create a global,
business-to-business electronic marketplace for buyers and sellers of
indirect goods. However, the use of the Internet as a means of transacting
business is relatively new and has not been accepted by all customers in the
markets we have targeted. If the rate of growth of the Internet use in or
targeted markets is less than expected, or if the Internet fails to produce a
feasible electronic commerce marketplace, our revenues will suffer. We cannot
assure you that the use of the Internet as a means of conducting business
will continue to grow at a rate similar to the historical rates, if at all.
SECURITY RISKS OF ELECTRONIC COMMERCE MAY DETER FUTURE USE OF OUR PRODUCTS
AND SERVICES.
A fundamental requirement to conduct Internet-based,
business-to-business electronic commerce is the secure transmission of
confidential information over public networks. Failure to prevent security
breaches of the MARKETSITE marketplaces, or well publicized security breaches
affecting the Internet in general, could significantly harm our business,
operating results and financial condition. We cannot be certain that advances
in computer capabilities, new discoveries in the field of cryptography, or
other developments will not result in a compromise or breach of the
algorithms we use to protect content and transactions on MARKETSITE
marketplaces or proprietary information in our databases. Anyone who is able
to circumvent our security measures could misappropriate proprietary,
confidential customer information or cause interruptions in our operations.
We may be required to incur significant costs to protect against security
breaches or to alleviate problems caused by breaches. Further, a
well-publicized compromise of security could deter people from using the
Internet to conduct transactions that involve transmitting confidential
information.
IF WE RELEASE PRODUCTS CONTAINING DEFECTS, WE MAY NEED TO HALT
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FURTHER SHIPMENTS UNTIL WE FIX THE DEFECTS, AND OUR BUSINESS AND REPUTATION
WOULD BE HARMED.
Products as complex as ours often contain unknown and undetected
errors or performance problems. Many serious defects are frequently found
during the period immediately following introduction and initial shipment of
new products or enhancements to existing products. Although we attempt to
resolve all errors that we believe would be considered serious by our
customers before shipment to them, our products are not error-free. These
errors or performance problems could result in lost revenues or delays in
customer acceptance and would be detrimental to our business and reputation.
In the past, defects in our products have delayed their shipments after those
products have been commercially introduced. While these delays have not been
material to date, we cannot assure you that undetected errors or performance
problems in our existing or future products will not be discovered in the
future or that known errors considered minor by us will not be considered
serious by our customers.
WE MAY NOT BE ABLE TO HIRE AND RETAIN SUFFICIENT SALES, MARKETING AND
TECHNICAL PERSONNEL THAT WE NEED TO SUCCEED BECAUSE THESE PERSONNEL ARE
LIMITED IN NUMBER AND IN HIGH DEMAND.
If we fail to hire and retain sufficient numbers of sales, marketing
and technical personnel, our business, operating results and financial
condition would be harmed. Competition for qualified sales, marketing and
technical personnel is intense as these personnel are in limited supply, and
we might not be able to hire and retain sufficient numbers of such personnel
to grow our business. We need to substantially expand our sales operations
and marketing efforts, both domestically and internationally, in order to
increase market awareness and sales of our BUYSITE and MARKETSITE PLATFORM
and the related services we offer. We will also need to increase our
technical staff to support the growth of our business. In addition, our
competitors have in the past attempted to hire our employees away from us. We
expect that they will continue to attempt to do so in the future.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Our future success depends upon the continued service of our
executive officers and other key personnel, and none of our executive
officers or key employees is bound by an employment agreement for any
specific term. If we lose the services of one or more of our executive
officers or key employees, or if one or more of them decide to join a
competitor or otherwise compete directly or indirectly with us, our business,
operating results and financial condition would be seriously harmed. In
particular, the services of Mark Hoffman, our Chief Executive Officer, would
be difficult to replace.
WE INTEND TO EXPAND OUR INTERNATIONAL OPERATIONS AND THESE EFFORTS MAY NOT BE
SUCCESSFUL IN GENERATING ADDITIONAL REVENUES.
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Although we have yet to generate any significant international
revenues, we are planning to increase our international operations and sales
efforts. We cannot assure you that we will generate international revenues or
that risks of international sales and operations will not harm us.
International business involves inherent risks, and we anticipate
the risks that may affect us include:
- unexpected changes in regulatory requirements and tariffs that may be
imposed on electronic commerce;
- difficulties in staffing and managing foreign operations;
- longer payment cycles and greater difficulty in accounts receivable
collection;
- potentially harmful tax consequences;
- fluctuating exchange rates;
- price controls or other restrictions on foreign currency; and
- difficulties in obtaining export and import licenses.
In addition, we have only limited experience in marketing, selling
and supporting our products and services in foreign countries. We do not have
any experience in developing foreign language versions of our products. This
may be more difficult or take longer than we anticipate especially due to
international problems, such as language barriers or currency exchange
issues, and the fact that the Internet infrastructure in such foreign
countries may be less advanced than the Internet infrastructure in the United
States.
BECAUSE THE PROTECTION OF OUR PROPRIETARY TECHNOLOGY IS LIMITED, OUR
PROPRIETARY TECHNOLOGY COULD BE USED BY OTHERS WITHOUT OUR CONSENT.
Our success depends, in part, upon our proprietary technology and
other intellectual property rights. To date, we have relied primarily on a
combination of copyright, trade secret, and trademark laws, and nondisclosure
and other contractual restrictions on copying and distribution to protect our
proprietary technology. While we acquired three filed patent applications as
part of our acquisition of VEO Systems in January 1999, we have no issued
patents to date. We cannot assure you that our means of protecting our
intellectual property rights in the United States or abroad will be adequate
or that others, including our competitors, will not use our proprietary
technology without our consent.
Furthermore, litigation may be necessary to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs
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and diversion of resources and could harm our business, operating results and
financial condition.
IF THIRD PARTIES CLAIM THAT WE INFRINGE UPON THEIR INTELLECTUAL PROPERTY, OUR
ABILITY TO USE CERTAIN TECHNOLOGIES AND PRODUCTS COULD BE LIMITED AND WE MAY
INCUR SIGNIFICANT COSTS TO RESOLVE THESE CLAIMS.
Litigation regarding intellectual property rights is common in the
Internet and software industries. We expect that third-party infringement
claims involving Internet technologies and software products and services to
increase. If an infringement claim is filed against us, we may be prevented
from using certain technologies and may incur significant costs to resolve
the claim.
We have in the past received letters suggesting that we are
infringing the intellectual rights of others, and we may from time to time
encounter disputes over rights and obligations concerning intellectual
property. Although we believe that our intellectual property rights are
sufficient to allow us to market our existing products without incurring
liability to third parties, we cannot assure you that our products and
services do not infringe on the intellectual property rights of third parties.
In addition, we have agreed, and may agree in the future, to
indemnify certain of our customers against claims that our products infringe
upon the intellectual property rights of others. We could incur substantial
costs in defending ourselves and our customers against infringement claims.
In the event of a claim of infringement, we and our customers may be required
to obtain one or more licenses from third parties. We cannot assure you that
we or our customers could obtain necessary licenses from third parties at a
reasonable cost or at all.
OUR PRODUCTS DEPEND UPON THE CONTINUED AVAILABILITY OF LICENSED TECHNOLOGY
FROM THIRD PARTIES.
We license and will continue to license certain technology integral
to our products and services from third parties. Our inability to acquire any
third-party product licenses, or integrate the related third-party products
into our products, could result in delays in product development until
equivalent products can be identified, licensed and integrated. We also
expect to require new licenses in the future as our business grows and
technology evolves. We cannot assure you that these licenses will continue to
be available to us on commercially reasonable terms, if at all.
SPENDING BY OUR CUSTOMERS TO EVALUATE AND ADDRESS YEAR 2000 COMPLIANCE COULD
RESULT IN LOWER DEMAND FOR OUR PRODUCTS AND SERVICES.
As the year 2000 approaches, orders for our products and services
may be reduced or delayed as information technology departments within
companies reallocate their capital expenditures to prepare for the year 2000
and resolve year 2000 problems. If companies do reduce or defer purchases of
our products
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and services because of such reallocation, our business, operating results
and financial condition could be harmed.
POTENTIAL YEAR 2000 PROBLEMS WITH OUR INTERNAL OPERATING SYSTEMS OR THE
SOFTWARE PRODUCTS THAT WE SELL COULD BE COSTLY TO REMEDY AND COULD DECREASE
DEMAND FOR OUR PRODUCTS.
We have designed and tested our products to be year 2000 compliant.
However, we cannot assure you that our current products do not contain
undetected errors or defects associated with year 2000 date functions.
Further, we cannot assure you that the technology we license from third
parties and incorporate into our products do not contain errors or defects.
If any such errors or defects do exist, we may incur material costs to
resolve them. The internal systems used to deliver our services utilize
third-party hardware and software. Although we believe that the costs of
ensuring that these systems are year 2000 compliant will not be material, we
cannot assure you of this.
In addition, our customers' and commerce service provider partners'
internal operating systems and other software applications must operate
effectively for them to use our products and services effectively. If these
systems or applications are not year 2000 compliant, the customers may not
use our products and services and the commerce service provider partners may
not be able to host our solutions. We cannot predict to what extent our
customers' and commerce service provider partners' systems and applications
are year 2000 compliant.
WE DO NOT HAVE A DISASTER RECOVERY PLAN OR BACK-UP SYSTEMS, AND A DISASTER
COULD SEVERELY DAMAGE OUR OPERATIONS.
We currently do not have a disaster recovery plan in effect and do
not have fully redundant systems for our service at an alternate site. A
disaster could severely harm our business because our service could be
interrupted for an indeterminate length of time. Our operations depend upon
our ability to maintain and protect our computer systems in our principal
facilities in Walnut Creek, California and Mountain View, California, which
exist on or near known earthquake fault zones. We will depend on British
Telecommunications for hosting the MARKETSITE marketplace in the United
Kingdom, Nippon Telegraph and Telephone for hosting the MARKETSITE
marketplace in Japan and Singapore Telecommunications for hosting the
MARKETSITE marketplace in Southeast Asia if these marketplaces are
successfully developed and launched. Although these systems are designed to
be fault tolerant, they are vulnerable to damage from fire, floods,
earthquakes, power loss, telecommunications failures and similar events.
OUR PUBLICATION OF INACCURATE CATALOG CONTENT DATA COULD CAUSE THE LOSS OF
CUSTOMERS AND EXPOSE US TO LEGAL LIABILITY.
The accurate publication of supplier catalog content is critical to
our customers' businesses. Our MARKETSITE PLATFORM product contains content
management tools that help suppliers manage the collection and publication of
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their catalog content. The failure of these tools to accurately publish
catalog content could deter businesses from participating in the MARKETSITE
marketplaces, damage our business reputation, harm our ability to win new
customers and potentially expose us to legal liability. In addition, from
time to time some of our customers may submit to us inaccurate pricing or
other catalog information. Even though such inaccuracies are not caused by
our work and are not within our control, similar consequences could occur. We
currently do not carry insurance that would adequately cover losses which may
be incurred as a result of inaccurate content publication.
ADDITIONAL GOVERNMENT REGULATIONS MAY INCREASE OUR COSTS OF DOING BUSINESS.
The laws governing Internet transactions remain largely unsettled.
The adoption or modification of laws or regulations relating to the Internet
could harm our business, operating results and financial condition by
increasing our costs and administrative burdens. It may take years to
determine whether and how existing laws such as those governing intellectual
property, privacy, libel, consumer protection and taxation apply to the
Internet.
Laws and regulations directly applicable to communications or
commerce over the Internet are becoming more prevalent. We must comply with
new regulations in both Europe and the United States, as well as any other
regulations adopted by other countries where we may do business. The growth
and development of the market for online commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad, as
well as new laws governing the taxation of Internet commerce. Compliance with
any newly adopted laws may prove difficult for us and may harm our business,
operating results and financial condition.
WE EXPECT OUR OPERATIONS TO CONTINUE TO PRODUCE A NEGATIVE CASH FLOW;
CONSEQUENTLY, IF WE CANNOT RAISE ADDITIONAL CAPITAL, WE MAY NOT BE ABLE TO
FUND OUR CONTINUED OPERATIONS.
Since our inception, cash used in our operations has substantially
exceeded cash received from our operations, and we expect this trend to
continue for the foreseeable future. We currently anticipate that our
available cash resources, combined with the net proceeds from this offering
will be sufficient to meet our anticipated working capital and capital
expenditure requirements for at least the next eighteen months. The estimate
of the time period in which our cash resources and proceeds from the offering
will be sufficient to meet our working capital and capital expenditure needs
is a forward-looking statement that involves risks and uncertainties. The
actual time period may differ materially from that indicated in the
forward-looking statement as a result of a number of factors so that we
cannot assure you that such resources will be sufficient for anticipated or
unanticipated working capital and capital expenditure requirements for this
period. Factors that may vary significantly affect whether our cash resources
are sufficient to meet our needs for the period indicated include our
expectation that we will continue to incur net losses and our continuing
incurrence of substantial negative cash flow. If adequate funds are
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not available or are not available on acceptable terms, we may not be able to
take advantage of unanticipated opportunities, develop new products or
services, fund our continued operations, or otherwise respond to
unanticipated competitive pressures. We cannot assure you that any additional
financing we may need will be available on terms favorable to us, if at all.
INTERNET RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY
DEPRESS OUR STOCK PRICE.
The stock market and specifically the stock prices of Internet
related companies have been very volatile. This volatility is often not
related to the operating performance of the companies. This broad market
volatility and industry volatility may reduce the price of our common stock,
without regard to our operating performance. Due to this volatility, the
market price of our common stock could significantly decrease.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The following discusses our exposure to market risk related to changes in
interest rates, foreign currency exchange rates and equity prices. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number
of factors including the risk factors noted in the section entitled "Risk
Factors" beginning on page 19.
Interest Rate Risk
As of September 30, 1999, we had cash and cash equivalents of
approximately $116.2 million which consist of cash and cash equivalents with
original maturities of three months or less at the date of purchase. These
investments may be subject to interest rate risk and will decrease in value
if market interest rates increase. A hypothetical increase or decrease in
market interest rates by 10 percent from the market interest rates at
September 30, 1999 would cause the fair value of these short-term investments
to change by an immaterial amount. Declines in interest rates over time will,
however, reduce our interest income.
Foreign Currency Exchange Rate Risk
Substantially all of our revenues recognized to date have been
denominated in U.S. dollars. Future license fees and services revenues
derived from international markets could be denominated in the currency of
the applicable foreign market. As a result, our operating results could
become subject to significant fluctuations based upon changes in the exchange
rates of certain currencies in relation to the U.S. dollar. Furthermore, if
we engage in international sales denominated in U.S. dollars, an increase in
the value of the U.S. dollar relative to foreign currencies could make our
products less competitive in international markets. Although we will continue
to monitor our exposure to currency fluctuations, and, when appropriate, may
use financial hedging techniques in the future to minimize the effect of
these fluctuations, we cannot assure you that exchange rate fluctuations will
not harm our business in the future.
Equity Price Risk
We do not own any equity investments. Therefore, we are not
currently exposed to any direct equity price risk.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in disputes in the normal course of business. The
Company does not believe that the outcome of any of these disputes or
litigation will have a material effect on the Company's business, financial
condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 19, 1999, the Company closed the private placement of 2,758,819
shares of Series E Preferred Shares at a per share price of $9.06 (giving
effect to the two-for-one reverse stock split) and on July 7, 1999, the
Company closed the initial public offering of 3,795,000 shares of Common
Stock at a price per share to the public of $21.00 and the concurrent private
placement of 1,013,171 shares of Common Stock at a price per share of $19.74.
The net proceeds to us as a result of these transactions are estimated to be
$116.5 million, after deducting underwriting discounts and other expenses.
We expect to use these proceeds for general corporate purposes, principally
working capital, capital expenditures, geographic expansion of our
operations, potential acquisitions, and additional sales and marketing
efforts. Pending use of the net proceeds of the private placement of Series E
Preferred Stock, the initial public offering and the concurrent private
placement, we have invested the net proceeds in interest-bearing,
investment-grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
3.0 Amended and restated certificate of Incorporation
of Commerce One, Inc.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three months
ended September 30, 1999.
35
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMERCE ONE, INC.
Dated: November 12, 1999 /s/ Peter F. Pervere
----------------- -----------------------------
Peter F. Pervere
Vice President and Chief
Financial Officer
Dated: November 12, 1999 /s/ Mark B. Hoffman
----------------- ---------------------------
Mark B. Hoffman
President, Chief Executive
Officer and Chairman
36
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
COMMERCE ONE, INC.
(Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware)
Mark B. Hoffman and Robert M. Tarkoff each hereby certifies:
(1) They are the President and Secretary, respectively, of Commerce One,
Inc., a corporation organized and existing under the General Corporation Law of
the State of Delaware (the "General Corporation Law");
(2) The original Certificate of Incorporation of this corporation,
originally filed on March 24, 1999, is hereby amended and restated in its
entirety to read as follows:
FIRST: The name of this corporation is Commerce One, Inc. (the
"Corporation").
SECOND: The address of the Corporation's registered office in the State
of Delaware is 1209 Orange Street, Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such
address is Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the
General Corporation Law of Delaware.
FOURTH: The Corporation is authorized to issue two classes of stock to be
designated respectively Common Stock and Preferred Stock. The
total number of shares of all classes of stock which the
Corporation has authority to issue is Two Hundred Sixty Million
(260,000,000), consisting of Two Hundred Fifty Million
(250,000,000) shares of Common Stock, $0.0001 par value (the
"Common Stock"), and Ten Million (10,000,000) shares of Preferred
Stock, $0.0001 par value (the "Preferred Stock").
The Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized subject
to limitations prescribed by law, to fix by resolution or
resolutions the designations, powers, preferences and rights, and
the qualifications, limitations or restrictions thereof, of each
such series of Preferred Stock, including without limitation
authority to fix by resolution or resolutions, the dividend
rights, dividend rate, conversion rights, voting rights, rights
and terms of redemption (including sinking fund provisions),
redemption price or prices, and liquidation
<PAGE>
preferences of any wholly unissued series of Preferred Stock, and
the number of shares constituting any such series and the
designation thereof, or any of the foregoing.
The Board of Directors is further authorized to increase (but not
above the total number of authorized shares of the class) or
decrease (but not below the number of shares of any such series
then outstanding) the number of shares of any series, the number
of which was fixed by it, subsequent to the issue of shares of
such series then outstanding, subject to the powers, preferences
and rights, and the qualifications, limitations and restrictions
thereof stated in the resolution of the Board of Directors
originally fixing the number of shares of such series. If the
number of shares of any series is so decreased, then the shares
constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the
number of shares of such series.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: The election of directors need not be by written ballot unless
the Bylaws of the Corporation shall so provide.
SEVENTH: The number of directors which constitute the whole Board of
Directors of the Corporation shall be designated in the Bylaws of
the Corporation.
EIGHTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors is
expressly authorized to adopt, alter, amend or repeal the Bylaws
of the Corporation.
NINTH: To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or may hereafter be amended,
no director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director.
The Corporation may indemnify to the fullest extent permitted by
law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he, his testator or
intestate is or was a director, officer or employee of the
Corporation or any predecessor of the Corporation or serves or
served at any other enterprise as a director, officer or employee
at the request of the Corporation or any predecessor to the
Corporation.
Neither any amendment nor repeal of this Article, nor the
adoption of any provision of this Amended and Restated
Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article in respect
of any matter occurring, or any cause of action, suit or claim
-2-
<PAGE>
that, but for this Article, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
TENTH: At the election of directors of the Corporation, each holder of
stock of any class or series shall be entitled to one vote for
each share held. No stockholder will be permitted to cumulate
votes at any election of directors.
The number of directors which constitute the whole Board of
Directors of the Corporation shall be fixed exclusively by one or
more resolution adopted from time to time by the Board of
Directors. The Board of Directors shall be divided into three
classes designated as Class I, Class II, and Class III,
respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders
following the date hereof, the term of office of the Class I
directors shall expire and Class I directors shall be elected for
a full term of three years. At the second annual meeting of
stockholders following the date hereof, the term of office of the
Class II directors shall expire and Class II directors shall be
elected for a full term of three years. At the third annual
meeting of stockholders following the date hereof, the term of
office of the Class III directors shall expire and Class III
directors shall be elected for a full term of three years. At
each succeeding annual meeting of stockholders, directors shall
be elected for a full term of three years to succeed the
directors of the class whose terms expire at such annual meeting.
Vacancies created by newly created directorships, created in
accordance with the Bylaws of this Corporation, may be filled by
the vote of a majority, although less than a quorum, of the
directors then in office, or by a sole remaining director.
ELEVENTH: Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the
Corporation may be kept (subject to any provision contained in
the laws of the State of Delaware) outside of the State of
Delaware at such place or places as may be designated from time
to time by the Board of Directors or in the Bylaws of the
Corporation.
The stockholders of the Corporation may not take any action by
written consent in lieu of a meeting, and must take any actions
at a duly called annual or special meeting of stockholders and
the power of stockholders to consent in writing without a meeting
is specifically denied.
TWELFTH: Advance notice of new business and stockholder nominations for
the election of directors shall be given in the manner and to the
extent provided in the Bylaws of the Corporation.
-3-
<PAGE>
THIRTEENTH: Notwithstanding any other provisions of this Restated Certificate
of Incorporation or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any
affirmative vote of the holders of the capital stock required by
law or this Restated Certificate of Incorporation, the
affirmative vote of the holders of at least two-thirds (2/3) of
the combined voting power of all of the then-outstanding shares
of the Corporation entitled to vote shall be required to alter,
amend or repeal Articles NINTH, TENTH, ELEVENTH or TWELFTH
hereof, or this Article THIRTEENTH, or any provision thereof or
hereof, unless such amendment shall be approved by a majority of
the directors of the Corporation.
FOURTEENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated
Certificate of Incorporation, in the manner now or hereafter
prescribed by the laws of the State of Delaware, and all rights
conferred herein are granted subject to this reservation.
(3) This Amended and Restated Certificate of Incorporation has been duly
adopted by the Board of Directors of this Corporation in accordance with
Sections 242 and 245 of the General Corporation Law.
(4) This Amended and Restated Certificate of Incorporation has been duly
approved, in accordance with Section 242 of the General Corporation Law, by vote
of the holders of a majority of the outstanding stock entitled to vote thereon.
IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Certificate of Incorporation on this 7th day of July, 1999.
/s/ Mark Hoffman
----------------
Mark B. Hoffman
President
/s/ Robert M. Tarkoff
- ---------------------
Robert M. Tarkoff
Secretary
-4-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF OPERATIONS AND STATEMENT OF CASH FLOWS INCLUDED IN THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDING SEPTEMBER 30,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 116,161
<SECURITIES> 0
<RECEIVABLES> 7,777
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 131,617
<PP&E> 5,691
<DEPRECIATION> 0
<TOTAL-ASSETS> 153,329
<CURRENT-LIABILITIES> 28,900
<BONDS> 0
0
0
<COMMON> 199,902
<OTHER-SE> (75,916)
<TOTAL-LIABILITY-AND-EQUITY> 153,329
<SALES> 11,504
<TOTAL-REVENUES> 16,669
<CGS> 0
<TOTAL-COSTS> 9,532
<OTHER-EXPENSES> 42,850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (33,907)
<INCOME-TAX> 586
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,493)
<EPS-BASIC> (5.02)
<EPS-DILUTED> (5.02)
</TABLE>
